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Last week in Damascus, just days after the highest ranking visit from a U.S. official in years, Syrian President Bashar Assad hosted a state dinner for his Iranian counterpart Mahmoud Ahmedinajad. Welcoming Ahmedinajad so close on the heels of the U.S. diplomatic good will gesture was a pointed Syrian slight to the Obama administration, but the icing on the cake was Assad’s other guest of honor at the feast: Hezbollah leader Hassan Nasrallah.

For Damascus and Tehran—the last two U.S.-designated state sponsors of terrorism in the Middle East—Hezbollah has long constituted a strategic asset and a point of pride. More recently, the organization successfully worked to broaden its appeal throughout the region. And indeed, after the Shiite terrorist organization fought Israel to a standstill in 2006, Hezbollah’s stature in the Arab world skyrocketed. Not only was Nasrallah the most compelling Arabic orator, Hezbollah became the most positive personification of Shiites in the largely Sunni Muslim region.

That was 2006. Today, while Hezbollah remains a formidable “resistance” force, in the past two years, a number of setbacks have tarnished the organization’s carefully cultivated image in Lebanon and the broader Arab world. Hezbollah’s military prowess may not be in doubt, but now for the first time, Lebanese and other Middle Easterners are starting to question the organization’s once unscrupulous morality. Nearly three decades after its establishment, the resistance has institutionalized and bureaucratized, and Hezbollah is starting to resemble other, corrupt Lebanese organizations.

More by David Schenker

The problems of the Party of God, Hezbollah's English translation, started in May 2008, when the militia violated its cardinal rule and turned its weapons—allegedly intended for use against Israel—on Lebanese citizens, when the organization invaded Beirut. Continuing this trend, three months later the militia opened fire (accidentally, Hezbollah says) on a Lebanese army helicopter, killing the co-pilot. Then, in November 2008, a 49-member Hezbollah cell was arrested in Egypt, accused of plotting attacks against Israeli tourists and Suez Canal shipping. (Nasrallah responded to the arrests by publicly calling on Egyptians to topple their government).

Setbacks continued into 2009. First came a damaging report in the May edition of Der Spiegel, implicating the militia in the 2005 assassination of former Lebanese premier Rafik Hariri. (These allegations were recently confirmed by Le Monde). A month later, the heavily favored militia lost the Lebanese elections to its pro-West rivals.

Adding insult to injury, less than a week after its defeat at the polls, the organization was dealt yet another blow, when mass demonstrations erupted in Iran protesting the fraudulent elections. The rallies challenged Iran’s clerical leadership and its controversial doctrine of velayat-e faqih (Islamic government), threatening the seat of power of Hezbollah’s spiritual leader and financial patron Supreme Leader Ali Khamenei.

As if this weren’t enough, in September 2009 one of the militia’s chief local financiers, Salah Ezzedin, went bankrupt in a Ponzi scheme, ala Bernard Madoff. Ezzedin, who had promised rates of return up to 80 percent, ended up swindling 10,000 Lebanese Shiites out of an estimated $300 million.

Among the setbacks of the past two years, the Ezzedin scandal was perhaps the most damaging to Hezbollah because the militia’s leadership was so close to the disgraced financier, a relationship that led many investors to trust him with their money. (Indeed, Ezzedin named his publishing house after Nasrallah’s son, Hadi, who was killed by Israel in 1997). The Ezzedin affair implicated Hezbollah in the same kind of corruption it routinely accused the pro-West Sunni Government in Beirut of perpetrating.

Recognizing the implications for the organization’s reputation, Hezbollah went into damage-control mode. Nasrallah repeatedly denied any connection to the affair, claiming that the party itself lost $4 million. According to the Arabic news service Elaph, he also instructed Hezbollah clerics to issue a “fatwa-like” directive forbidding the mention of the militia in connection to the scandal, lest it provide fodder for Israeli and American propaganda machines to further “besmirch the organization’s name.”

But the damage was already done. In Lebanon, Hezbollah’s long suffering detractors were giddy with schadenfreude; meanwhile, many of the organization’s supporters expressed profound disappointment.